Tag: net interest margin

Banks are likely to face a dent in their margins in the year ahead.

Net interest margins (NIM), a key indicator of profitability, which have improved for the banks in the last one year are likely to be compressed as borrowings pick up in the year ahead and deposit rates face pressure.

Rising margins

The banks have seen a sharp drop in credit offtake due to pandemic-led slowdown. On the other hand, they saw a huge rise in deposits.

helped with policy cuts, banks have cut interest rates heavily on deposits and lending. However, the drop in interest rates has been bigger than on lending. The weighted average term deposit rate has fallen 80 basis points in the first nine months of this fiscal, while the weighted average lending rate on outstanding loans has fallen by 62 bps. This has led to an increase in banks’ net interest margins in the last one year.

Fourth-quarter NIMs

Net interest margins, which is the difference between the interest income earned and the interest paid by a bank or financial institution relative to its interest-earning assets like cash, have remained in the above 3-percent bracket in the third quarter.

For the December quarter, NIM has remained stable for State Bank of India at 3.34%. For ICICI Bank, it expanded sequentially to 3.67%.

While for Axis Bank, NIM before interest reversals stood at 3.59%.

The year ahead

Credit offtake is expected to be robust in the coming financial year, which would mean a higher demand for deposit funds and hence, a higher rate of interest. This is expected to be driven by investment demand from infrastructure and real estate sectors as well as the release of pent-up consumer demand, thus resulting in high growth in retail finance.

However, experts have started questioning the ability of RBI to continue with its accommodative stance along with trying to achieve its macro-economic targets for inflation and fiscal deficit. All macro-economic indicators together point towards an inevitable rise in deposit rates starting from the second half of the FY 2021-22. Some banks and non-banking finance companies have already started increasing deposit rates across tenures, especially rates on longer-term FDs.

Credit offtake

Banks gave out credit at a faster rate during the fortnight ending February 12, as compared to the same period last year, helped by an increase in retail loans. The bank credit growth was recorded at 6.6%, marginally higher from the 6.4% recorded last year, a report by CARE Ratings showed. With this, the credit growth is back in the range that was last seen during the early months of the pandemic. The credit growth of banks ranged between 6.5% to 7.2% in April 2020.

Deposit growth

Deposits with banks have also increased during the period under review. deposits increased 12.06 during the fortnight ended February 12, 2021, compared with 11.1% growth registered during the fortnight ended January 29, 2021, and also as compared with the previous year,” CARE Ratings said. The report further added that the outflows in debt mutual fund and equity mutual fund could support the rise in bank deposits. Of these deposits, time deposits grew at 89% while demand deposits account for the remaining 11%.